New Front Opens in Non-Agency Market

A number of mortgage-bond issuers are working on non-agency deals backed entirely by conforming loans on single-family investment properties.

Since Flagstar Mortgage issued a first-of-its-kind deal on May 21, others including Carrington Mortgage, J.P. Morgan and TIAA have begun assembling pools of agency-eligible loans written to individual borrowers who buy single-family rental properties for investment purposes.

A flurry of offerings is expected to hit the market late in the year, with some bankers predicting issuance volume of several billion dollars.

While Fannie Mae and Freddie Mac are willing to buy mortgages on investment homes, the accounts are assigned higher risk weightings due to the fact that during periods of economic stress, investors tend to become delinquent sooner than traditional homeowners. For that reason, the agencies assess higher fees to guarantee loans secured by investor-owned homes.

So-called guarantee fees get factored into funding costs when the accounts are securitized. While there’s been no recent increase in those fees, funding costs in the non-agency market have come down to the point where it currently may be cheaper to bundle conforming mortgages as private-label deals. In most cases, the mortgages on investment properties don’t meet the Bureau of Consumer Financial Protection’s “qualified mortgage” standards.

Issuers already have priced $4.5 billion of bonds backed by rental-home cashflows this year. But the underlying borrowers for those deals mostly have been institutional property owners, as opposed to the individuals represented in the conforming-loan pools — which industry participants see as more akin to traditional mortgage portfolios.

Mortgage-bond volume, meanwhile, is up substantially this year. That’s in part because of a related trend in which issuers including Flagstar and J.P. Morgan have begun mixing conforming mortgages into their jumbo-loan securitizations. Year-to-date, $15.3 billion of private-label mortgage bonds have priced in the U.S., according to Asset-Backed Alert’s ABS Database. That compares to $8.2 billion during the same period last year.

But non-agency deals backed entirely by conforming loans represent a new breed of mortgage securities. Flagstar’s $329 million offering was led by J.P. Morgan and Wells Fargo. A $265.7 million tranche of triple-A-rated senior bonds with four-year lives went out the door at 110 bp over swaps — in line with the yields currently available in the agency market.

The collateral accounts have an average principal balance $305,000 — well below the agency buying limit — and an average loan-to-value ratio of 65.5%, according to a presale report from DBRS. The borrowers have a weighted average credit score of 769.

“Investor-property loans aren’t your typical mortgage, another banker said. “It was well-documented during the crash that borrowers walked away from these homes first. The agencies want to be compensated, which is opening the door for private-label to take over.”